Six social media companies for your portfolio

2018 was a tough year for social media companies. Two factors were at work:

concerns over privacy, data use and election rigging on industry giant Facebook’s platform, and

a very weak Chinese equity market (down over 20%) which pressured even the most dominant Chinese companies such as Tencent and Alibaba as well as high growth names like Weibo and YY Inc.

Despite these headwinds, a social media user survey conducted in December 2018 by investment bank JP Morgan among 1,065 US Internet users indicates social media usage remains strong and steady.

Key takeaways included from the survey included:

Facebook remains the most used platform, utilised by 88% of respondents, followed by Facebook Messenger (61%), Instagram (47%), Twitter (32%), Snapchat (24%) and WhatsApp (15%)

Time spent on social media over the last year remained the same for 43% of respondents, increased for 29% and decreased for 28%.

Facebook was overwhelmingly viewed as the most important social media platform (56%) and Instagram users are the most satisfied with the platform at 62%.

It’s no surprise then that Facebook’s 4Q 2018 solid earnings report showed, that contrary to some investor’s fears, advertisers and users were still actively using the platform. Average revenue per user or “ARPU” came in at a record high US$34.00 for North America and daily active users (DAUs) and monthly active users (MAUs) grew sequentially. On the conference call CEO Zuckerberg said the company had increased headcount over 40% on the previous year, and the majority of those new hires were working on privacy, personal data, and “fake news” issues.

China based companies Weibo, YY and Tencent have had a tough 12 months. We believe this is temporary and related to a weak equity market (and in the case of Tencent regulatory concerns). We expect a decent rebound in 2019 for all three companies.

Macrovue’s Head of Investment Committee Clay Carter lists six of his favourite social media companies, each offering significant upside potential in 2019.

Momo (NASDAQ: MOMO)

Launched in 2011, Momo, based in China, is a location-based mobile social networking platform that enables users to establish and expand social relationships based on location and interests. In September 2015 Momo launched live streaming services and offered the service to a limited number of pre-selected performers. In April 2016, Momo opened up the service to all users so everyone can become a broadcaster. Live streaming revenue took off since its launch and has become the biggest revenue contributor for Momo. Also, in 4Q16, Momo introduced a virtual gifting service to enhance user interaction and social networking with others. Momo is now one of China's leading mobile-based social and entertainment platforms that include a live-streaming platform and online dating platforms. Momo was listed on Nasdaq in December 2014.

Growth drivers include:

Momo is likely to continue to gain share in live broadcasting - its core business. Although Momo is the No.1 talent show live broadcasting platform in China, it has just a 21% market share which could be increased via further collaboration with top guilds (Momo is currently relatively moderate in guild cash incentives), a royalty system, which has proven to be an average revenue per user (ARPU) accretive on peer platforms, and the development of VAS (virtual gifting) in non-live streaming social activities such as chatrooms and social games, which should continue to grow faster than core live streaming revenue.

Tantan (China’s Tinder - an online dating app), acquired in early 2018, has only just begun to monetise its large user base. Since January 2018 its paying user base has grown to 3.6 million users. Tantan contributed RMB164 million in Q3 FY18 to Momo’s sales. Tantan has 94.4 million monthly active users (MAUs), over three times that of Tinder. Management has high hopes for Tantan due to the 300 million millennials in China and the higher mobile internet penetration rates, particularly among millennials. Tantan’s revenue per subscriber ARPU was merely 11% of Tinder’s in 2Q18 with a comparable subscriber base so there’s a lot of upside here.

Momo reported 3Q earnings on 5 December 2018. Key highlights include:

3Q total revenue was US$536mn, up 51% (roughly 1% higher than the Bloomberg consensus and within company guidance)

4Q revenue guidance was Rmb3,655-3,755mn, up 43-47%. Using US$/RMB exchange rate of 6.9, guidance was US$530-544mn, the mid-point is 3% lower than the Bloomberg consensus.

Average daily active users (DAUs) were 126M (+9%) with 99M from International and 27M from the United States.

Revenue breakdown:

Advertising, $791M (consensus: $756.8M)

Data Licensing, $118M (consensus: $108M)

Q1 revenue guidance is $715M to $775M (consensus: $766.1M), with operating income of $25M to $35M.

For 2019, TWTR expects GAAP and cash operating expenses to be up 20% as it invests in priorities such as health, conversation, revenue product and sales, and platform. TWTR also expects capex of $550M-$600M in 2019.

Weibo (NASDAQ: WB)

Weibo held their annual “Influence Summit” on 21-23 December 2018 in Beijing and reviewed the company’s performance in 2018 and presented new initiatives for 2019.

WB’s CEO Mr. Gaofei Wang said during his keynote speech that since the overall growth of internet users has slowed down in 2018, competition will be shifted toward the time that each user spends on the platform. Thus, he believes, it is important to strengthen the user “stickiness” of the WB platform in order to retain its competitive position and better meet users’ demand. Fulfilling users’ interests should be more important than attracting users’ traffic. That clearly is the goal for Weibo in 2019.

New initiatives in 2019 include:

Expansion of the WB platform - increase the number of verticals to >70 from current 60 with new additions of folk-art forms and vocal music as well as building a better ecosystem and monetisation systems;

For Video - focus on empowering big Vs with positioning of social network with more resources toward original series, personalised and IP featured videos

Regarding the commerce ecosystem - paid content subscription (V+) and ecommerce are still the two major long-term directions for the company.

YY Inc (NASDAQ: YY)

YY has a leading position in China’s live talent show broadcasting industry (No.2 in China by 2018 revenue) and is breaking into new categories and initiatives (Huya in eSport and Bigo overseas) which should obviate the inevitable slowdown in YY’s core business as increased competition from alternative mobile apps which may divert some users away from the platform.

Bigo, YY’s successful live streaming app for markets outside China, could be a potential growth catalyst in next 6-12 months. Analysts have forecast that Bigo revenue could reach up to US$550-600m in full year 2018 (up circa 100% annually, circa 25% of YY Group's revenue in 2018).

Also, YY formed an exclusive partnership with Xiaomi in October 2018 to operate live streaming on Xiaomi Live. This will operate on a revenue sharing basis, whereas the brand ad and user acquisition cost will be borne by Xiaomi Live. Management has also indicated that YY is actively looking to collaborate with more domestic partners on similar initiatives. These will expand the distribution channels of YY’s content and have the potential for additional monetisation.

Alphabet (NASDAQ: GOOGL)

Alphabet reported 4Q 2018 earnings on 5 February 2019 with a positive “double beat” on earnings and revenues.

Alphabet Q4 GAAP EPS of $12.77 beat by $1.91.

Revenue of $39.28B (+21.5%) was ahead by $380M. Revenue breakdown:

Google Properties, $27.02B (consensus: $26.75B);

Google Network Members' Properties, $5.6B (consensus: $5.56B);

Google Other, $6.5B (consensus: $6.43B);

Other Bets, $154M (consensus: $187.4M).

Traffic acquisition costs (TAC) were $7.4B (consensus: $7.62B; up from $6.58B in Q3) or 23% of revenue, down a percentage point from last year's quarter.

Also, the company repurchased $2.7bn of shares (up from $2.1-2.2bn for the last four quarters) and authorised repurchases for an additional $12.5bn.

Tencent (HKG: 0700)

Tencent shares have been pressured over the past 12 months by a number of factors: a weak Chinese equity market (-20% YTD), concerns regarding a slowdown in the Chinese economy, and uncertainty over when the government will provide approvals for its newer online games. We believe that these market and macro headwinds are relatively short term in nature and that Tencent will negotiate a positive outcome with the government regarding gaming regulation in 2019.

Analysts also remain positive on Tencent because of its “jewel in the crown”- the fully integrated mobile user platform WeChat. Going forward, Tencent should be able to drive earnings growth by further monetising its strengths in mobile advertising, mobile gaming, and mobile payments.

Tencent has also recently flagged a new strategic direction where the company hopes to build on the foundation of its successful consumer internet presence focusing on the industrial internet for various key industries. This recent reorganisation upgrade and its latest strategic focus on “industrial Internet” should position it as a key digital assistant to industry partners, whereby Tencent could create another internet empire surrounding enterprises and providing support to provincial and municipal services.

Conclusion

While the social media sector has had a tough 12 months, we believe that the growth opportunities and long-term investment potential are intact. Social networks, gaming and video/photo sharing are not going away. If anything, they will remain pervasive in both the developed and developing world as platforms are transformed via new technology and content.

As for China, the biggest market of all, we note that analysts are turning more positive on China’s Internet sector's 2019 earnings growth and share price outlook, due to an improving regulatory environment in a few important subsectors (gaming, ecommerce, local consumption etc), introduction of growth-supportive measures and stimulus plans by the government, and of course attractive valuation multiples of the major players.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual and does not constitute financial advice. Consider the appropriateness of the information in regards to your circumstances.

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